Fiction Surrounding Banks and their Payment Processors

When you last made your network choice for PIN-based debit card transaction routing, what was the deciding factor? Was it interchange income? Was it expense savings or avoidance of PIN-less routing? Or was it simply that you chose (or, more aptly, felt forced into) the network that your core or EFT processor provides? If it is the latter or you cannot answer this question, you are most likely losing a fight in which you may have had no idea you were participating. Your opponent? The ever-growing giants of processing in an ever-shrinking ring of industry consolidation.

As the article title insinuates, there are many examples of the two sides of any interchange story – sale vs. purchase, interchange paid vs. interchange earned (aka acquiring vs. issuing OR expense vs. income), SIG vs. PIN, card-present vs. card-not-present. The list is nearly infinite. For our purposes though, let’s focus on an age-old example of the two basic sides to every story … fact or fiction.

• FACT:  Not all PIN networks are created equal. Your institution has a choice of which vendor processes your customers’ debit card transactions from the point-of-sale, and they all have varying negotiable switch fees and tiers and types of interchange income pay rates. There are several good choices and several bad ones: TWO SIDES – above-average interchange profit OR below-average interchange profit.
• FICTION:  Your core/EFT processor offers the best PIN network option(s). Probably not.In most cases, it is the exact opposite. Processors are negotiating with the merchants to get as many transactions routed over their network(s) as possible by offering lower PIN and PIN-less rates than competitor networks. TWO SIDES – processor network OR non-processor network; TWO MORE SIDES – supports PIN-less routing OR doesn’t support PIN-less.
• FACT:  Merchants control the network choice now. The only ways to fight back in the ongoing battle of limiting and lowering PIN POS interchange rates are to limit the network choices on your card to the minimum of two and to choose two networks that offer the best net rates possible. TWO SIDES – Merchant chooses to route over a desirable network OR merchant is forced to route over one of YOUR chosen networks.
• FICTION:  Your processor is only interested in PIN POS transactions. Nope. Your processor is, depending on the processor, creating a SIG routing network to compete with Visa and Mastercard, and this will not be good for your income.There are several PIN network processors rolling out SIG routing networks in the near future, and you can bet their merchant-friendly, shareholder-centered strategies of optimizing PIN transaction volume growth will be adopted for their SIG network optimization plans. Don’t fix what ain’t broken, right? In fact, some networks deemed to be ATM-only have recently “opened” POS routing to merchants to gain transaction share. TWO SIDES – take ownership of your debit card line-of-business OR continue to function blindly.
• FICTION:  You can trust your processors self-reporting of their interchange rates. Again, no. This should be self-explanatory if you’ve read any of the article to this point. Absolutely not. ONE SIDE – no.

The rumors on the street since sometime around mid-2016 to early-2017 (depending on the circles you run in) have been that the largest networks and processors have been negotiating deals for lower PIN and PIN-less pay rates with the largest merchants (Walmart, Kroger, etc.). If those rumors were true, we’re starting to see the effects of said negotiations now. NOTE:  We’re not saying these were true, nor that we have definitive proof, but where there’s smoke …

Ask yourself the following questions if you are, in fact, participating in your core/EFT processor’s PIN network:  What happened to our PIN-based interchange income over the past 2+ years? Has it gone down? Has it gone down significantly? When we compare it the FED Interchange Study (which is somewhat flawed but generally accurate), where do we stack up against those rate averages? Do we even know how to measure and compare it appropriately?  If these answers are all negative, or complete unknowns, rest assured that many institutions are experiencing these problems. But now is the time to take action and regain control of that interchange income. The prevalent lack of clarity in community financial institutions is also two-sided